Trading the futures market is inherently risky, and regardless of the size of your account or the perceived risk of your positions, the chances of regular wayward trades is high. It’s a dog eat dog world, and you need to make sure over the long haul your returns from successful positions outstrip your losses to […]

What to Look for in a Futures Broker Choosing a futures broker is one of the most basic and foundational steps to getting started trading futures, yet it can have implications on your trading success for years to come. Making a bad decision and choosing an unreliable or untested broker could land you in serious […]

Futures contracts are hugely popular instruments amongst a diverse cross-section of traders, from private individuals through to massive, multi-million dollar hedge funds. Futures provide traders with a flexibility that isn’t available with many other instruments, and allows longer-term positions to be taken through a highly leveraged, cost-effective channel. Two of the main purposes of futures […]

Futures Trading Academy

Futures trading allows investors to speculate on price fluctuations over time, providing a tradable, standard instrument that can be bought, sold and executed to realize a profit. Like many other derivatives, futures afford in-built leverage to provide the trader with the opportunity to maximize his gains from asset price movement, and as a consequence have grown to become one of the most widely traded instruments on global markets today.

Basic Elements of Futures Trading

Futures contracts are essentially self-defining – they are standard contracts giving rise to a future trade based on today’s price point of a given underlying asset. The essential ingredients for any futures contract are a specific date on which the position will mature, a price point, and a defined asset, e.g. wheat, steel, US government bonds.

Futures can be traded on commodities, stocks and even other instruments, and are traded in liquid markets worldwide by both private investors and large-scale investment houses alike. They work by tying in traders to execute a particular trade (or to reverse their futures position) before a specific date, allowing them to profit on the difference between the quoted future price and the actual future price.

Liquidity

One of the main advantages of trading futures contracts is the role of liquidity. Liquidity refers to the ability to trade an asset for cash. Cash in a bank account, theoretically, could be considered the ultimate liquid asset – any ATM, pretty much anywhere in the world, will convert your bank balance into cash instantly on demand, in a relevant currency so you can spend immediately.

For traders of futures contracts, their instruments are entirely liquid, insofar as they are exchange traded and there is a vast market of traders on both sides. By nature of the function of stock exchanges, institutional investors often ‘make’ markets, agreeing to execute corresponding positions of traders by default where there is no other willing buyer, allowing the market to flow with virtually absolute liquidity across different tradable instruments.